PRICING STRATEGY OF PROCTER & GAMBLE

PRESENTED BY: ABHISHEK CHAKRABORTY ANU SHRIVASTAVA NIDHI BHALLA

´PRICE DETERMINATION IS A KEY RESPONSIBILITY IN ANY ORGANIZATION AND THE STAKES AT GETTING IT RIGHT ARE VERY HIGH FOR ANY ENTREPRENEUR. ONE NEEDS TO TAKE INTO ACCOUNT A HOST OF FACTORS BEFORE NARROWING DOWN ON NOT JUST THE METHOD THAT THE COMPANY WOULD FOLLOW IN THE LONG TERM FOR ITS PRICING DECISION BUT ALSO FOR THE ACTUAL SHORT TERM-REAL TIMEPRICE. IT·S ALL ABOUT BEING COMPETITIVE IN THE MARKET TODAY WITH AN EYE ON THE FUTURE.µ

PRICING OBJECTIVE
CURRENT PROFIT MAXIMIZATION CURRENT REVENUE MAXIMIZATION MAXIMIZE QUANTITY MAXIMIZE PROFIT MARGIN QUALITY LEADERSHIP PARTIAL COST RECOVERY SURVIVAL STATUS QUO

THE SCENARIO
In the early 1990's Procter & Gamble made dramatic and long-term changes in its pricing and promotion strategy. Procter & Gamble (P&G), a leading consumer packaged goods producer, instituted a "value pricing strategy" during which it boosted advertising while simultaneously curbing its distribution channel deals (in-store displays, trade deals), and significantly reducing its coupon promotions. This grand experiment leads us to a whole host of questions. What impact did the strategy have on brand loyalty? How did competitors respond? What was the "bottom line" impact on market share?

³Procter & Gamble made dramatic and long-term changes in its pricing and promotion strategy during which it boosted advertising while simultaneously curbing its distribution channel deals (in-store displays, trade deals), and significantly reducing its coupon promotions.´

UNDERSTANDING:WHAT INSPIRED P&G TO INITIATE THIS VALUE PRICING STRATEGY? WHAT WERE THE GOALS OF VALUE PRICING? WHAT WAS THE COMPETITIVE REACTION?

WHAT WAS THE TOTAL IMPACT ON P&G? WHAT HAPPENED TO P&G·S THEORY THAT PRICE PROMOTIONS REDUCE LOYALTY? WHAT ARE THE EFFECT COMPETITIVE RESPONSE? OF THE

WHAT INSPIRED P&G TO INITIATE THIS VALUE PRICING STRATEGY?

First was logistical efficiency, and Second, P&G was concerned with the impact of promotions on brand loyalty.

WHAT WERE THE GOALS OF VALUE PRICING?
First, it sought to improve efficiency. The administrative and production costs for promotions, deals, and coupons were becoming increasingly expensive and cumbersome for P&G, distributors, and retailers. Second, since the theory was that coupons and deals only invited brand switching and destroyed brand loyalty, cutting back on deals should leave P&G with a stronger brand franchise.

WHAT WAS THE COMPETITIVE REACTION?
During the same time period, the overall competition's (including companies such as Colgate, Unilever, and Gillette) net price paid increased 10%, advertising increased 6.3%, deals increased 13.1%, and coupons decreased 17.1%. Of the three competitors, only Gillette lowered prices and it increased coupons use by 127.6% -- far more than Colgate. Overall, the competition did not completely cooperate with P&G, but neither did it take full advantage in a mad grab for market share.

WHAT WAS THE TOTAL IMPACT ON P&G?
P&G's Value Pricing Strategy showed no change in share of requirements or category usage, but it did end up with a reduced penetration rate, which declined 16%. This was because the cut in promotions resulted in fewer consumers buying P&G brands, and neither the cut in promotions nor the increase in advertising had any appreciable effect on SOR(Share of Requirement). Overall, P&G's market share decreased 16%. Although P&G lost market share, it is possible that its profits remained stable or even increased. It lost 16% of share, but made up for this through increased prices 20%, a lower cost of good sold, and efficiencies in production. However, the increase in advertising expenditures may have wiped out most of the cost savings. Despite gain or loss in profitability, P&G lost their strategic and esteemed position as the market leader in the consumer packaged goods industry. Traditionally, P&G had a sharp focus on market share leadership as the ultimate metric of success, and yet for the first time since the 1950s, Colgate overtook P&G's Crest as the market leader.

WHAT HAPPENED TO P&G·S THEORY THAT PRICE PROMOTIONS REDUCE LOYALTY? Analyzing P&G's value pricing strategy shows that promotion cuts decreased penetration but did not dramatically increase loyalty. So, P&G's initial beliefs were myths indeed. Additionally, increasing advertising had little effect on market share. When you are the market share leader the effect of advertising is diminished. Market share leaders already have high awareness levels, and unless your advertising provides new compelling reasons to buy (usually rooted in innovative product differentiation) there is little upside beyond maintenance advertising.

WHAT ARE THE EFFECT OF THE COMPETITIVE RESPONSE?
The competitors reacted to P&G's strategy in a way that cushioned P&G's loss - the competition could have destroyed P&G, but P&G's losses were mostly self-inflicted. Of the competitors, Gillette was the only one to take a contrarian strategy and was fairly successful. What do you do about sharp competitors like Gillette? P&G decided to buy this one.

THE IMPACT
From 1990 -1996, the net price paid by consumers of P&G products increased 20.4% (due to the decrease of coupons use by 54.3%, and reduction in price cuts). Meanwhile P&G increased advertising by 20.7%, and decreased channel deals by 15.7%.

MARKET PERFORMANCE FRAMEWORK

PEN = PENETRATION SOR = SHARE OF REQUIREMENT USE = CATEGORY USAGE

THE EXPERTS MICROSCOPE
Analyzing P&G's Value Pricing Strategy, Scott Neslin and his colleagues investigated how their strategy affected brand loyalty, whether their customer base increased or decreased, how the competitors reacted, and how the strategy affected market share. To determine this, Neslin broke market share into three components: Penetration (PEN), Share of Requirement (SOR), and Category Usage (USE).

PEN is the percentage of category buyers who buy the brand at least once; SOR measures brand loyalty and is expressed as the percentage of category purchases in which the consumer chooses the P&G product, among those who purchase the P&G brand at least once; USE is an adjustment for heavy and light users. In summary, PEN is basically how many customers you have; SOR is how frequently these customers buy the brand (a measure of loyalty), and USE is whether the brand's customers are disproportionately light or heavy users.

Using the following formula you can equate market share: Market Share = PEN x SOR x USE One could conjecture that, with their new pricing strategy, P&G's PEN would decrease, but SOR would increase more than PEN and improve market share. Neslin created separate regression models for PEN, SOR, and USE. To achieve this, he used P&G's price, promotion, coupon, and advertising expenditures and the competition's price, promotion, coupon, and advertising expenditures as independent variabes.

He quantified these as the net price paid for an item, percent sold on deal, percent sold with a coupon, and media advertising dollars. Neslin was unable to include a specific measure for distribution but distribution is captured indirectly in the catch-all "error term" of the model. Neslin's analysis shows that although price, advertising expense, deals, and coupons (from both P&G and competitors) affect PEN, SOR, and USE, price has the largest affect on the three market share components. Most interestingly, advertising had little effect on all three components, and deals and coupons actually a slight positive impact on SOR. While this is contrary to the view that promotions destroy brand loyalty, it may simply be due to the fact that promotions keep consumers in the brand, whether because they love the brand or because they can buy it at a decent price.

CONCLUSION / RESULT
The insights into P&G's grand experiment demonstrate to us the importance of promotional pricing, and the diminished power of mass advertising for high share players. Analysis of P&G's value pricing strategy allows us to see how major long-term policy changes, not short-term marketing mix changes, affect market share and competitors' reaction. Studying P&G's value pricing strategy offers the unique opportunity for marketers to analyze major policy changes, obtain clearer understanding of how marketing mix changes affect brands, learn about long-term impacts of marketing changes, and inform future policy decisions.

It is also important to note that success can be measured more than one way. In essence, the P&G grand experiment may have been successful when measured by profits, and at the time those profits were being used to invest in new innovations. However, for a company that traditionally measured success by volume (market share) its value pricing strategy truly had a large enough adverse impact on share that it was eventually abandoned.

PRODUCT COVERAGE
AIR FRESHNER: FRBREZE AIR FRESHNER ANTIPERSPIRANTS & DEODORANTS : OLD SPICE, SECRET BABY & CHILD CARE : CHARMIN, CHILDREN·S PEPTO, CLEARBLUE EASY, PAMPERS, PUFFS. BATTERIES: DURACELL BODYWASH & SOAPS: CAMAY, OLAY, OLD SPICE, SAFE GUARD, ZEST. COLOGNES : OLD SPICE COSMETICS : COVER GIRL, MAX FACTOR DISH WASHING: CASCADE, DAWN, IVORY, JOY. ORAL CARE:- BRAUN, CREST, SCOPE, ORAL-B. LAUNDRY AND FABRIC CARE:- TIDE, ERA, GAIN, BOUNCE. HEALTH CARE: ALIGN, PEPTO-BISMOL, VICKS HAIR CARE: AUSSIE, HEAD & SHOULDERS, INFUSIUM 23, PANTENE SKIN CARE: BARUN, GILLETE COMPLETE SKINCARE, OLAY.

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